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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Personal Financial Planning

Mr. Kapoor, aged 40, wants a retirement corpus in 20 years. He has a current annual expense of ₹6,00,000, expects inflation of 5% a year, and wants the first retirement-year expense to equal today's expense in real terms. Approximately what annual expense must the corpus fund in the first retirement year? (1.05^20 ≈ 2.65)

The first retirement-year expense will be about ₹15,90,000. Compounding ₹6,00,000 at 5% inflation for 20 years multiplies it by roughly 2.65. Simple or single-year inflation understates the requirement because inflation compounds over time.

  1. A₹15,90,000Correct
  2. B₹12,00,000
  3. C₹6,30,000
  4. D₹18,00,000

Explanation

Inflated expense = 6,00,000 × 1.05^20 ≈ 6,00,000 × 2.65 = ₹15,90,000. Doubling (₹12,00,000) ignores compounding. ₹6,30,000 inflates for one year only. ₹18,00,000 uses simple inflation of 100% over 20 years (5% × 20 × 6,00,000 added, giving 12,00,000, then miscomputed).

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